According to the WSJ, "Worries about a shortage [of wheat] already have sent grain prices soaring, threatening a potentially damaging bout of food inflation.... The high stakes in coming weeks show how thin the margin for error is in the global food supply. The appetites of many nations are growing, and they rely on international trade to sate it."
What happens next depends on two countries: 1) Russia, which is battling raging forest fires caused by a record heat wave, and has temporarily banned wheat exports. And 2) the US, which supplies almost a third of the world's wheat. American farmers have only weeks to decide whether to seed extra fields. The farmer who plants extra wheat stands to lose money if predictions of a shortage in Russia turn out to be false.
The article describes how uncertainty about Russia clouds the future:
Russia's crop next year is dependent on the drought breaking. Seeds in the Black Sea region that includes Russia and Ukraine need at least an inch or two of rain in coming weeks.... But there is little rain in the near-term forcast.Meanwhile, locusts threaten Australia's harvest. Egypt, the world's largest wheat importer, anticipates having to spend nearly an extra $1 billion to buy wheat. In 2008, Egypt faced the prospect of political upheaval due to wheat shortages. Another shortage would have political implications for Thailand, Indonesia and even Russia. Some lessons about the need to stock-up may have been learned in 2008. Russia is already buying wheat from France. India has massive stockpiles.
The unfolding global reaction to Russia's export ban makes it hard to predict whether the market for wheat will face a shortage or a surplus. In the short-term, in particular, it isn't clear what governments will do with their existing stocks.
Russia's Deputy Prime Minister Igor Shuvalov has said the government may revise the ban—currently set to run from Aug. 15 until Dec. 31—later this year, depending on the harvest. Meanwhile, the influential grain union is pressing the government to delay the start of the ban until Sept. 1.
Speculation is a major concern. As chocolate fanatics like me know, Cocoa futures speculation has led to staggering increases in the price of that delicious food this year. Some observers blame the 2008 food crisis on speculation by the major Wall Street banks. Frederick Kaufman, contributing editor of Harper’s Magazine and author of the piece The Food Bubble: How Wall Street Starved Millions and Got Away With It told Democracy Now that "their speculation and their restructuring of these commodity markets pushed 250 million new people into food insecurity and starving." The World Development Movement published a report on the episode, and then a defense of their research. The WDM report had been attacked in the Guardian by Seth Freedman. Freedman's defense of the speculators amounted to arguing that protectionist governments are worse than speculators:
Protectionist procedures, such as farming subsidies in the US and EU, are still causing havoc in the developing world as they allow subsidised commodities to be dumped in third-world countries, undermining domestic farming and hampering local growth.Freedman quoted a report by Goldman Sachs:
"Research by respected international bodies, like the OECD, demonstrates clearly that long-term trends, including increased meat consumption by the growing middle class in the emerging markets and the increased use of biofuels in the developed markets, have created a backdrop for global food shortages."Maybe Goldman Sachs would care to answer this question: Why are governments subsidizing biofuels? Why did a politician like Barack Obama, back when he was senator, work tirelessly on behalf of the biofuel industry? Now that he is serving in the White House, we have had an opportunity to question his administration's relationship with the still largely deregulated financial industry. And its the same story. Only the characters change. Whether the industry that holds the political process captive happens to be agriculture or finance, the outcome is identical: markets get distorted and the economy stops working for the people. It's not a case of free enterprise good, governments bad. It's not the reverse. It's that too many politicians today are hostage to corporate agendas.
Alarmingly, Russia's decision to hold back exports might be linked to speculation, reports Sanjuro, a frequent contributor to JOTMAN.COM. Surveying Russian language media sources, Sanjuro writes:
What to do about this? Frederick Kaufman said:Reactions to the food situation are somewhat muted - but now it appears Russia will harvest less than it consumes (likely a net importer again). I recall reading over a month ago in the Gazeta an interview with a "grain expert" that reassured that everything was "under control" and there "won't be shortages." Of course, as soon as I read that, I immediately urged my relatives to stock up.
Perhaps unrelated: there are speculations in the Russian web, that the Switzerland-based Glencore with interests in metals and grain is closely connected to Putin, and that was another reason to cut exports, allegedly to create a temporary price surge, by holding on to stocks for some time. Likely not true, but some large exporters will sure make a handsome profit.
So what’s the solution? I think the best solution that’s been floated around in Washington in the groups I’ve been close to is an actual international or national grain reserve. I mean, we actually in this country, before this kind of mania of deregulation, had a farmer-owned grain reserve under the Clinton administration, real grain held back, so that in times of a bubble like this, regulators can say, "Look, you know, we have plenty of real wheat. Here’s a hundred million bushels of wheat. We can bring it to the market. We can bring that price back into a stable band." And this is, I think, in some ways, the best solution: real wheat to counter virtual madness.Indeed. Governments need to be armed with the tools to protect the public from the the real and obvious dangers of abusive market capitalist excess. I wouldn't bet a return to Clinton-era sanity anytime soon, given feckless world leaders we have today, and their demonstrated allegiance to the financial industry (as evident by the austerity policy that G20 heads signed onto at the end of June in Toronto).
We have to hope it rains in Russia.
Freedman's attack on the WDM campaign was lamentable, agri subsidies do not then make speculation more agreeable. But mostly he just mischaracterised it to make a point about the profound issues of capitalism and starvation, but at least WDM were doing something, rather than just writing bad articles (although admittedly that is pretty well much all his talents stretch to). A food reserve of global use is I'm afraid too impossibly altruistic for global capital to conceive of, though if they can figure a market angle it could be a goer. Note though the reserve was not under Clinton other than time frame, it was farmer owned, Clinton's deregulation simply hadn't ruined them yet.
ReplyDeleteJotman,
ReplyDeleteThe 2010 picture is likely not as dramatic is pictured in the press (and embraced by speculators). Russia did ban exports, and is now trying to invite Belarus and Kazakhstan into similar bans, effectively creating a cartel. However, the Russian Govt maintains this is a temporray measure and the ban could be lifted or eased at any time.
For the year 2010, and early 2011, the comforting fact is that Russia does have significant stockpiles and in theory could even support its grain needs even without completely banning exports. Strafor estimates annual consumption at 75m tons, this year's production at about 65m t and the stockpiles at around 25m. So for this year, it's OK.
What many observers fail to notice is that a great portion (I don't know how much exactly, but it's significant) of each year's crop is the so-called "ozimiye" (winter crops), that are supposed to be planted in the late summer and be collected in the early spring. In many areas affected by the fires, these "winter crops" were not and won't be planted - and hence nothing to harvest in the spring 2011. Plus there's also a chance of another superhot summer, putting the 2011 Russian crop again below the usual bracket of 75-120m tons. And the stockpiles will be gone by the late 2011. That's when the real crisis could begin.
Sanjuro
Rick,
ReplyDeleteI also found the Freedman article frustrating.
In attempting to defend the speculators I thought it interesting -- and even helpful -- that Freedman wanted to focus on Euro agricultural and US biofuel subsidies, which, indeed are a big problem. But who are the most subsidized of the subsidized today? Their trick is never to define the notion of a subsidy broadly enough to get caught.
When discussing the economic nature of any modern commodity, it is important to remember that markets could give a rats bum about the physical thing. The issue is always with the "fininacialization" of that commodity.
ReplyDeleteThe price/production/supply of physical wheat is secondary to the effects of the accumulated tiers of derivatives that sit like mud above. The "market" is driven by these derivatives - indeed is the market - and not the physical stuff.
Starving people do not effect the "market" either way. That wheat is a commodity essential to human survival is not relevant to a market that can prosper regardless of the humans below.
Ensuring that wheat and wheat supplies react to human consumption would entail dismantling financialization, itself a fake commodity that has replaced the real thing over the last 20 years or so.
This is where the confusion lies between people who focus on the commodity, and people who focus on the market for that commodity. Apples and oranges.